Lecture 15

Virtual University of Pakistan 1

Introduction to Linear Regression and
Correlation Analysis in SPSS
 Goals
After this, you should be able to:
• Calculate and interpret the simple correlation
between two variables
• Determine whether the correlation is significant
• Calculate and interpret the simple linear regression
equation for a set of data
• Understand the assumptions behind regression
analysis
• Determine whether a regression model is
significant
 Goals
(continued)
After this, you should be able to:
• Calculate and interpret confidence intervals
for the regression coefficients
• Recognize regression analysis applications
for purposes of prediction and description
• Recognize some potential problems if
regression analysis is used incorrectly
• Recognize nonlinear relationships between
two variables
 Scatter Plots and Correlation

• A scatter plot (or scatter diagram) is used to

show the relationship between two variables
• Correlation analysis is used to measure strength
of the association (linear relationship) between
two variables
– Only concerned with strength of the
relationship
– No causal effect is implied
 Scatter Plot Examples
Linear relationships Curvilinear relationships

y y

x x

y y

x x
 Scatter Plot Examples
(continued)
Strong relationships Weak relationships

y y

x x

y y

x x
Scatter Plot Examples
(continued)
No relationship

x
 Correlation Coefficient
(continued)

• The population correlation coefficient ρ

(rho) measures the strength of the
association between the variables
• The sample correlation coefficient r is an
estimate of ρ and is used to measure the
strength of the linear relationship in the
sample observations
 Features of ρand r
• Unit free
• Range between -1 and 1
• The closer to -1, the stronger the negative
linear relationship
• The closer to 1, the stronger the positive
linear relationship
• The closer to 0, the weaker the linear
relationship
 Examples of Approximate
r Values
y y y

x x x
r = -1 r = -.6 r=0
y y

x x
r = +.3 r = +1
 Calculating the
Correlation Coefficient
Sample correlation coefficient:

r
 ( x  x)( y  y)
[ ( x  x ) ][  ( y  y ) ]
2 2

or the algebraic equivalent:

n xy   x  y
r
[n(  x 2 )  (  x )2 ][n(  y 2 )  (  y )2 ]
where:
r = Sample correlation coefficient
n = Sample size
x = Value of the independent variable
y = Value of the dependent variable
Calculation Example
Tree Trunk
Height Diamete
r
y x xy y2 x2
35 8 280 1225 64
49 9 441 2401 81
27 7 189 729 49
33 6 198 1089 36
60 13 780 3600 169
21 7 147 441 49
45 11 495 2025 121
51 12 612 2601 144
=321 =73 =3142 =1411 =713
 Calculation Example (continued)

Tree n xy   x  y
Height, r
y 70 [n(  x 2 )  (  x)2 ][n(  y 2 )  (  y)2 ]
60

8(3142)  (73)(321)
50 
40
[8(713)  (73)2 ][8(14111)  (321) 2 ]
30

 0.886
20

10

0
r = 0.886 → relatively strong positive
0 2 4 6 8 10 12 14
linear association between x and y
Trunk Diameter, x
 Excel Output
Excel Correlation Output
Tools / data analysis / correlation…

Tree Height Trunk Diameter

Tree Height 1
Trunk Diameter 0.886231 1

Correlation between
Tree Height and Trunk Diameter
 Significance Test for Correlation
• Hypotheses
H0: ρ = 0 (no correlation)
HA: ρ ≠ 0 (correlation exists)

• Test statistic
r
–
t  (with n – 2 degrees of freedom)
2
1 r
n2
Example: Produce Stores
Is there evidence of a linear relationship
between tree height and trunk diameter at
the .05 level of significance?

H0: ρ = 0 (No correlation)

H1: ρ ≠ 0 (correlation
exists)
 =.05 , df = 8 - 2 = 6
r .886
t   4.68
1 r 2 1  .886 2
n2 82
 Example: Test Solution

r .886 Decision:
t   4.68
1 r 2 1  .886 2 Reject H0

n2 82 Conclusion:

There is
d.f. = 8-2 = 6
evidence of a
linear relationship
/2=.025 /2=.025
at the 5% level of
significance
Reject H0 Do not reject H0 Reject H0
-tα/2 0
tα/2
-2.4469 2.4469
4.68
Introduction to Regression Analysis
• Regression analysis is used to:
– Predict the value of a dependent variable based
on the value of at least one independent variable
– Explain the impact of changes in an independent
variable on the dependent variable
Dependent variable: the variable we wish to
explain
Independent variable: the variable used to
explain the dependent variable
Simple Linear Regression Model

• Only one independent variable, x

• Relationship between x and y is
described by a linear function
• Changes in y are assumed to be
caused by changes in x
 Types of Regression Models
Positive Linear Relationship Relationship NOT Linear

Negative Linear Relationship No Relationship

 Population Linear Regression
The population regression model:
Population Random
Population Independent Error
Slope
y intercept Variable term, or
Coefficient
Dependent residual

y  β0  β1x  ε
Variable

Linear component Random Error

component
 Linear Regression Assumptions
• Error values (ε) are statistically independent
• Error values are normally distributed for any
given value of x
• The probability distribution of the errors is
normal
• The probability distribution of the errors has
constant variance
• The underlying relationship between the x
variable and the y variable is linear
 Population Linear Regression
(continued)

y y  β0  β1x  ε
Observed Value
of y for xi

εi Slope = β1
Predicted Value
Random Error
of y for xi
for this x value

Intercept = β0

xi x
Estimated Regression Model
The sample regression line provides an estimate of
the population regression line

Estimated Estimate of Estimate of the

(or predicted) the regression regression slope
y value
intercept
Independent

ŷ i  b0  b1x variable

The individual random error terms ei have a mean of zero

 Least Squares Criterion

• b0 and b1 are obtained by finding the

values of b0 and b1 that minimize the sum
of the squared residuals

e 2
  (y ŷ) 2

  (y  (b 0
2
 b1x))
 The Least Squares Equation
• The formulas for b1 and b0 are:

b1 
 ( x  x )( y  y )
 (x  x) 2

algebraic
equivalent: and
 xy   x y
b1  n b0  y  b1 x
 x 2

(  x ) 2

n
 Interpretation of the
Slope and the Intercept

• b0 is the estimated average value of y

when the value of x is zero

• b1 is the estimated change in the

average value of y as a result of a one-
unit change in x
Finding the Least Squares Equation

• The coefficients b0 and b1 will usually

be found using computer software, such
as Excel
• Other regression measures will also be
computed as part of computer-based
regression analysis
 Simple Linear Regression Example

• A real estate agent wishes to examine the

relationship between the selling price of a
home and its size (measured in square feet)

• A random sample of 10 houses is selected

– Dependent variable (y) = house price in
$1000s
– Independent variable (x) = square feet
Sample Data for House Price Model
House Price in $1000s Square Feet
(y) (x)
245 1400
312 1600
279 1700
308 1875
199 1100
219 1550
405 2350
324 2450
319 1425
255 1700
 Regression Using Excel
• Tools / Data Analysis / Regression
 Excel Output
Regression Statistics
Multiple R 0.76211
R Square 0.58082
Adjusted R
Square 0.52842 The regression equation is:
Standard Error 41.33032
Observations 10
house price  98.24833  0.10977 (square feet)

ANOVA Significance
  df SS MS F F
18934.934 11.084
Regression 1 18934.9348 8 8 0.01039
Residual 8 13665.5652 1708.1957
Total 9 32600.5000      

Coefficien P- Upper
  ts Standard Error t Stat value Lower 95% 95%
0.1289 232.0738
Intercept 98.24833 58.03348 1.69296 2 -35.57720 6
0.0103
Square Feet 0.10977 0.03297 3.32938 9 0.03374 0.18580
 Graphical Presentation
• House price model: scatter plot and
regression line
450
400
House Price ($1000s)

350
Slope
300
250
= 0.10977
200
150
100
50
Intercept 0
= 98.248 0 500 1000 1500 2000 2500 3000
Square Feet

house price  98.24833  0.10977 (square feet)

 Interpretation of the
Intercept, b0

house price  98.24833  0.10977 (square feet)

• b0 is the estimated average value of Y when

the value of X is zero (if x = 0 is in the range of
observed x values)
– Here, no houses had 0 square feet, so b0 =
98.24833 just indicates that, for houses within
the range of sizes observed, $98,248.33 is the
portion of the house price not explained by
 Interpretation of the
Slope Coefficient, b1

house price  98.24833  0.10977 (square feet)

• b1 measures the estimated change in

the average value of Y as a result of
a one-unit change in X
– Here, b1 = .10977 tells us that the average
value of a house increases by .10977($1000)
= $109.77, on average, for each additional
one square foot of size
 Least Squares Regression Properties

• The sum of the residuals from the least squares

regression line is 0 (  ( y  yˆ )  0)
• The sum of the squared residuals is a minimum
(minimized
2
( y  ˆ
y ) )
• The simple regression line always passes through the
mean of the y variable and the mean of the x variable

• The least squares coefficients are unbiased estimates

of β0 and β1
 Explained and Unexplained Variation

• Total variation is made up of two parts:

SST  SSE  SSR

Total sum Sum of Sum of
of Squares Squares Error Squares
Regression
SST   ( y  y )2 SSE   ( y  ŷ )2 SSR   ( ŷ  y )2
where:
y = Average value of the dependent variable
y = Observed values of the dependent variable
ŷ = Estimated value of y for the given x value
 Explained and Unexplained Variation
(continued)
• SST = total sum of squares
– Measures the variation of the yi values around their mean y
– SSE = error sum of squares
– Variation attributable to factors other than the relationship between x
and y
• SSR = regression sum of squares
– Explained variation attributable to the relationship between x and y
 Explained and Unexplained Variation
(continued)
y
yi 
 2
SSE = (yi - yi ) y
_
SST = (yi - y)2

y  _2
_ SSR = (yi - y) _
y y

Xi x
 Coefficient of Determination, R2
• The coefficient of determination is the
portion of the total variation in the
dependent variable that is explained by
variation in the independent variable

• The coefficient of determination is also

called R-squared and is denoted as R2
2 SSR where 2
0 R 1
R 
SST
 Coefficient of Determination, R2
(continued)

Coefficient of determination
2 SSR sum of squares explained by regression
R  
SST total sum of squares

Note: In the single independent variable case, the coefficient

of determination is
2 2
R r
where:
R2 = Coefficient of determination
r = Simple correlation coefficient
 Examples of Approximate
R Values
2

y
R2 = 1

Perfect linear relationship

between x and y:
x
R2 = 1
y 100% of the variation in y is
explained by variation in x

x
R = +1
2
 Examples of Approximate
R Values
2

y
0 < R2 < 1

Weaker linear relationship

between x and y:
x
Some but not all of the
y
variation in y is explained
by variation in x

x
 Examples of Approximate
R Values
2

R2 = 0
y
No linear relationship
between x and y:

The value of Y does not

x depend on x. (None of the
R2 = 0
variation in y is explained
by variation in x)
 Standard Error of Estimate
• The standard deviation of the variation of
observations around the regression line is estimated
by

SSE
s 
n  k 1
Where
SSE = Sum of squares error
n = Sample size
k = number of independent variables in the
model
 Comparing Standard Errors
Variation of observed y values Variation in the slope of regression
from the regression line lines from different possible samples
y y

small s x small sb1 x

y y

large s x large sb1 x

 Inference about the Slope:
t Test
• t test for a population slope
– Is there a linear relationship between x and y?
• Null and alternative hypotheses
– H0: β1 = 0 (no linear relationship)
– H1: β1 0 (linear relationship does exist)
• Test statistic
where:
b1  β1
– t b1 = Sample regression slope
sb1 coefficient
β1 = Hypothesized slope
sb1 = Estimator of the standard
– d.f.  n  2 error of the slope
 Inference about the Slope:
t Test
(continued)

House Price Estimated Regression Equation:

Square Feet
in $1000s
(x)
(y) house price  98.25  0.1098 (sq.ft.)
245 1400
312 1600
279 1700
The slope of this model is 0.1098
308 1875
199 1100 Does square footage of the house
219 1550 affect its sales price?
405 2350
324 2450
319 1425
255 1700
 Inferences about the Slope:
t Test Example
Test Statistic: t = 3.329
b1 sb1 t
H0: β1 = 0 From Excel output:
Coefficient Standard P-
HA: β1  0   s Error t Stat value
0.1289
Intercept 98.24833 58.03348 1.69296 2
d.f. = 10-2 = 8
Square 3.3293 0.0103
Feet 0.10977 0.03297 8 9
/2=.025 /2=.025
Reject H0
Reject H0 Do not reject H0 Reject H0
There is sufficient evidence
-tα/2 tα/2
0 that square footage affects
-2.3060 2.3060 3.329
house price
 Regression Analysis for
Description
Confidence Interval Estimate of the Slope:
b1  t /2 sb1 d.f. = n - 2

Excel Printout for House Prices:

Coefficient Standard Upper
  s Error t Stat P-value Lower 95% 95%
Intercept 98.24833 58.03348 1.69296 0.12892 -35.57720 232.07386
Square Feet 0.10977 0.03297 3.32938 0.01039 0.03374 0.18580

At 95% level of confidence, the confidence interval for

the slope is (0.0337, 0.1858)
 Regression Analysis for
Description
Coefficient Standard Upper
  s Error t Stat P-value Lower 95% 95%
Intercept 98.24833 58.03348 1.69296 0.12892 -35.57720 232.07386
Square Feet 0.10977 0.03297 3.32938 0.01039 0.03374 0.18580

Since the units of the house price variable is

$1000, we are 95% confident that the average
impact on sales price is between $33.70 and
$185.80 per square foot of house size

This 95% confidence interval does not include 0.

Conclusion: There is a significant relationship between
house price and square feet at the .05 level of significance